Frigidaire Sales Corp. v. Union Properties, Inc.
88 Wash.2d 400, 562 P.2d 244 (1977)
Rule of Law:
Limited partners do not incur personal liability as general partners for a partnership's obligations when they exercise control over the partnership solely by acting as officers, directors, or shareholders of the sole corporate general partner, provided the corporate form is respected and creditors are not misled.
Facts:
- Leonard Mannon and Raleigh Baxter were limited partners in a limited partnership named Commercial Investors.
- The sole general partner of Commercial Investors was a corporation, Union Properties, Inc.
- Mannon and Baxter were also the officers, directors, and shareholders of Union Properties, Inc.
- Through their roles at Union Properties, Inc., Mannon and Baxter exercised day-to-day control and management over the limited partnership, Commercial Investors.
- Frigidaire Sales Corporation entered into a contract with Commercial Investors.
- Mannon and Baxter signed the contract in their official corporate capacities as president and secretary-treasurer of Union Properties, Inc.
- Frigidaire knew it was contracting with a limited partnership whose sole general partner was Union Properties, Inc.
- Commercial Investors later breached its contract with Frigidaire Sales Corporation.
Procedural Posture:
- Frigidaire Sales Corporation sued Union Properties, Inc., Leonard Mannon, and Raleigh Baxter in a state trial court following a breach of contract by Commercial Investors.
- The trial court concluded that Mannon and Baxter did not incur general liability for the partnership's obligations.
- Frigidaire, as appellant, appealed the decision to the Washington Court of Appeals.
- The Court of Appeals affirmed the trial court's judgment in favor of Mannon and Baxter, as appellees.
- Frigidaire, as petitioner, was granted review by the Supreme Court of Washington.
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Issue:
Do limited partners become liable as general partners for a limited partnership's obligations when they exercise day-to-day control over the partnership by acting as officers, directors, and shareholders of the sole corporate general partner?
Opinions:
Majority - Hamilton, J.
No. Limited partners do not become liable as general partners for a limited partnership's obligations merely because they exercise control over the business while acting in their capacities as agents of the corporate general partner. The court reasoned that when limited partners control the partnership through their roles in a separate corporate entity, it is the corporation, not the individuals, that is exercising control. As long as the limited partners conscientiously maintain the separation between their personal affairs and the corporation's affairs, and do not perpetrate fraud or injustice on third parties, the corporate entity should be respected. The court distinguished this case from others by noting that petitioner Frigidaire was never led to believe that Mannon and Baxter were acting in any capacity other than their corporate roles and knew it was dealing with a corporate general partner. Any concerns about the corporation being undercapitalized should be addressed through the corporate law doctrine of 'piercing the corporate veil,' not by ignoring the corporate form under partnership law.
Analysis:
This decision reinforces the legitimacy of using a corporate general partner to shield individuals from liability in a limited partnership. It clarifies that the statutory 'control rule,' which can impose general partner liability on a limited partner who 'takes part in the control of the business,' does not automatically apply when that control is exercised through a formal corporate structure. The ruling forces creditors to be diligent; if they are concerned about the solvency of a corporate general partner, their recourse is to seek personal guarantees or, in cases of wrongdoing, to attempt to pierce the corporate veil. This holding protects the ability of individuals to act as both limited partners and corporate officers without unexpectedly taking on personal liability for the partnership's debts.
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